Today I received a personal letter by Wilfred Nagel, Chief Risk Officer of ING Bank.
He challenged some of the conclusions that I made in my previous article “Wilfred Nagel, CRO of ING: “Small and Medium Enterprises should collect more equity money, instead of borrowing money at the banks” and he pointed me at the poor research that I did, before writing that article.
Nagel argued that a number of questions that I asked in my article, had already been answered in ING Groups annual report.
With this article, I want to rectify some of the unfounded statements in my previous article. Besides that, I want to apologize to him and to ING in general for the poor research that I did.
In the remainder of this article, I will print the questions that I asked in the aforementioned article and the answers that I received from Wilfred Nagel today.
My question: Are there very risky assets on the balance sheet or are most assets virtually risk-free?
Wilfred Nagel’s answer: The risk rating breakdowns can be found in the risk section of the annual report. The average risk rating is 13, which is 3 notches below investment grade.
My question: Are all assets indeed maintained at real market prices nowadays?
Nagel’s answer: An overview of the various accounting classes is also printed in the annual report.
Loans are accounted against nominal value, minus provisions. Most bonds are accounted at AFS (available-for-sale) or Trading level: both levels mean om practice ‘marked to market’.
The number of Level 3 assets [i.e. assets, measured by using 'valuation techniques that incorporate inputs, which are unobservable and which have a more than insignificant impact on the value of the instrument' - EL] is minimal. Besides that: the IFRS prescribes very exactly how these assets should be measured, and in practice this is subject to assessment by EY accountants.
My question: Did the banks sufficiently write off on their previously overvalued assets, like residential and commercial real estate, sovereign bonds and mortgage backed securities?
Nagel’s answer: The policy, as well as the methodology and the numbers have been printed in the annual report. We follow the IFRS in this matter, by the way, and the DNB, aided by CBRE and BlackRock, have performed an investigation on our real estate, which did not deliver any problems. This has been printed in all newspapers.
Every quarter, we valuate all our problem loans, looking at the cash flow of the customer and at the fair value of available securities and pledges. Half of what we call NPL (non-performing-loans) does actually not have an arrears yet, but has a 50% risk of getting into problems within the next 12 months. In this matter, we are actually very conservative.
This is also applicable to our residential mortgages: we do not only count the mortgages which are 90+ days in arrears, but also the mortgages that have been in arrears, but are currently not anymore. This happens during a time frame of six months, after the arrears has been resolved.
The difference between this approach and the Basel definition (90+ days only) is approximately 0.7%. Hence, we are showing 1.9% of arrears, but according to the Basel approach – which is maintained by Rabobank and ABN Amro – it would only be 1.2%.
Last, but not least: you talk often about real estate on the bank balance sheets. We hardly own this: this is about loans that should be valuated. Some of these loans have real estate as a pledge. However, that is something totally different.
My question: Or are there still dead bodies everywhere?!
Nagel’s answer: The word ‘still’ is totally misplaced. And the answer is NO!
My question: How many loans to private and corporate customers run a risk of not being paid back?
Nagel’s answer: 2.8%. This is mentioned in the annual report, just as the size of the watch list.
My question: How many houses and office buildings, carrying a mortgage, are currently underwater?
Nagel’s answer: 33% of the housing mortgages are currently underwater. I don’t know the number for Commercial Real Estate by heart, but it is much lower. The average loan-to-value for CRE is 77%
My question: How many of their private and corporate mortgagers are in arrears these days?
Nagel’s answer: 1.9% of the residential mortgages and 10.7% of the Commercial Real Estate.
I can only thank Wilfred Nagel of ING for this extensive answer to my questions and for the valuable insights that he gave me today.